If you carry workers' compensation coverage, you probably
know about additional premiums—that often whopping lump sum
due at the end of your policy period when the insurer conducts an
audit to calculate what your final premium actually should be.
Paying that lump sum can be a significant cash-flow headache,
especially for growing or seasonal operations that can't
precisely predict what their payrolls will be a year in advance.
But there is a solution.
A growing number of insurance companies and payroll services are
teaming up to offer automatic direct payment of workers'
compensation insurance premiums as part of regular payroll
processing. The treatment for premiums is similar to the way taxes
are handled, calculating them based on the actual payroll using a
complex process that considers job classifications, claims records
and other factors, and then remitting them with each payroll run.
The result is that you won't have any audit surprises or large
lump sum payments either upfront or at the end of the policy
period, says Robert King, director of workers' compensation
product development for Fireman's Fund Insurance Co. in Novato,
California. You also won't have any refunds due to inadvertent
overpayments.
Fireman's Fund has an agreement with Advantage
Payroll Services, based in Auburn, Maine, to provide a
pay-as-you-go service to mutual clients. While the program sounds
simple, setting it up takes substantial effort and commitment.
"Putting together a program like this, to make it as robust
and accurate as needed, takes a considerable investment on our part
and on the part of the carrier," says Philip Horrisberger,
vice president of business development for Advantage. Even so, the
companies don't charge extra for the service; rather, they see
it as a solid method of customer retention that's well worth
the expense.
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And business owners appreciate the investment. "It's a
good cash-management tool, and it's very good for a company
that does not have a standard payroll," says Heidi Miller, 43,
owner of Silver Brush, a hair salon in Bradenton, Florida. "My
salon income and compensation expenses fluctuate. With this
program, when my income is greater, I'm paying a little more;
when my income is not as great, I'm paying less." Another
benefit, she says, is that the annual audit is easier, faster and
much less intrusive because the payroll information and supporting
documentation has already been provided.
A number of protections for customers are built into the system.
Insurance companies require participating payroll services to be
bonded and insured, so clients are assured the money collected is
remitted to the carrier. The insurance company works with the
payroll service and the client upfront to make sure employees are
properly classified and the premium calculation will be accurate.
And because the premium is paid with every payroll cycle,
discrepancies can be spotted and corrected quickly, before they
become substantial.
To participate, you must use a payroll service that has an
agreement with your workers' comp carrier. Insurers require
that your payroll be processed by an independent outside company,
not internally, to qualify for this type of payment arrangement.
Explains King, "This is one of the things that makes a payroll
service worth purchasing. For some companies, this is what moves
them in that direction." If you already use a payroll service,
ask whether they have any such agreements. Or, if you're
shopping for one, ask your insurance carrier whether they have
formed any agreements with payroll services. Currently, only a few
services and insurers have set up pay-as-you-go programs, but King
predicts that, within five years, it will be a common and accepted
way of paying workers' comp premiums.